Red Flags That Lead to IRS Audit for Your Small Business

Taxes are unavoidable! Whether you are earning as a business owner or a salaried person. But everything will remain streamlined if you pay your taxes on time.

You can only pay your taxes when you have the adequate team to look into this matter.

This team is specialized in doing business auditing for your company so that you don’t get audited by any external or government authority.

Generally, business owners avoid these tasks from their bookkeepers, by keeping a thought in the mind that IRS only targets big corporations.

This is a myth from which they should come out. There is no escape route if you get caught red-handed by the IRS.

So, you should go for your bookkeeping services from a genuine source, which specializes in accounting services for small business.

Being conscious of these IRS can help you do the filling accordingly and fly under the radar.

In this article, we will discuss the red flags or bookkeeping triggers the IRS will be looking for.

1. NET LOSSES YEAR-OVER-YEAR:

If the reports you provide says net losses in more than two of the five years of operation of a firm, then you are likely to be audited by the IRS.

Individual entrepreneurship is at risk as compared to other businesses.

ADVICE: If somehow IRS found losses from a sole proprietorship, prepare for an audit. And to reduce or keep clear from IRS keep revisiting your income, profit, loses and deductions. And if you have proper receipts and documents of the deduction then you can move forward without caution with the help of a bookkeeper.

2. FILLING TAXES LATE:

Consistently filling late taxes in addition to penalty fees can attract IRS attention towards your business.

ADVICE:  Prepare yourself even before the tax season. Generally, accounting services for small business go by this method. If you are unable to do it, then always file the taxes in time. Avoid waiting until the last minute to pay the taxes.

3. HIGH SALARIES TO THE EMPLOYEES:

 Generally, SMEs have to be careful while paying to their employees, as high earners will surely invite the IRS. The employees pay should be according to the industry’s standards; an income slab rate should be followed for a skill. If the salary distributed by a small business is higher than the average ratio, the IRS may get a whiff of it and the chance of audit gets higher.

ADVICE: Research from the market about the salary for a type of work; take advice from the industry experts. Closely observe what other companies offer and provide employees as per the regulations of the market. So, you don’t attract IRS attention.

4. TOO MANY DEDUCTIONS:

Every deduction you make in your business should be according to taxation. As an SME owner, carefully choose the deduction and check those deductions.

A business has to incur various expenses: traveling expense, meal expenses, and many more, which comes under the deductions tab. And as mentioned earlier, sole traders are at the greater risk for audit. So, make wise decisions before choosing which deduction to take to make sure the audit doesn’t affect your business.

ADVICE: Always be updated from the tax experts with the new deductions from the government’s side. As new rules & regulations are placed regularly so it will be better to remain updated.

Take past deductions and compare them year-over-year. And the golden rule to avoid IRS is expense must be “ordinary and necessary”.

5. CASH TRANSACTIONS:

Cash transactions are the one, on which IRS keeps a close eye on. If you are in a business which mostly deals in cash, then you will surely get the attention of the IRS. The cause of attention is that the money is illegitimate, related to black money and money laundering. As these are difficult for the IRS to keep track and verify their source of income received in cash.

ADVICE: First of all, make the majority of your transactions on online portal (do fewer cash transactions as possible).

The best way to pay your business expenses is by using credit or debit card. But if you want to mainly pay in cash, then you have to be very cautious, precise and detailed in recording every transaction. And with this, you can create your own paper trail.

6. USING DIGITAL CURRENCY:

A new trend has come into the currency market. Digital currencies like bitcoin, Ethereum, ripple, etc. are now being popular, but are still not considered as a “legal tender to pay”.

If you use digital currency in the business then IRS will get a chance to go deep under all your transactions.

ADVICE: As digital currencies have not met the tag of “legal tender”, so you should avoid using it.

7. FOREIGN EARNED INCOME:

Generally, large business corporations run their business in another country and earn their profits, which are taxable. The tax is paid in the host country, so you are eligible for “foreign earned income exclusion”. IRS will make sure that the money earned is legitimate.

Advice: Employ bookkeepers who have knowledge area of tax policies of the countries you are operating in.

8. GIVING LARGE SUMS TO CHARITY:

 Charities done are a better way to raise the goodwill of the business in the market. But continuous and large amounts of charity may lead to suspicion because forwarding big amount can save up tax payments. Unreasonable donations are never welcomed in the eyes of the IRS.

ADVICE: If you want to give money to charity then make reasonable donations year-over-year and avoid getting audited for tax abuse.

9. TAXABLE INCOMES NOT REPORTED:

It is one of the most important tasks to report every income which is taxable irrespective of big or small. If there is a hint of suspicion about any income left unreported and is taxable, it is one of the major factors pushing IRS to audit that business.

ADVICE: Report every taxable income which employee get paid and stay organized. Check weekly and monthly about every income in the firm.

10. CALCULATION ERRORS AND ROUNDED NUMBERS:

 Working in round numbers out of work is totally okay. But doing the same while filing the taxes is not appreciated. Decimals are necessary to be used as it is when it comes to the calculation of earnings and expenses.

ADVICE:  Never use round number or averages, always work and look for decimal points for earnings and expenses.

WHAT TO DO IF YOU GET AUDITED BY IRS:

If you get audited by IRS then you should contact your CPA right away to save from auditing. And if you don’t have CPA then you can contact account firm to save you from this. And other ways are:

  • Keep a positive attitude while talking to the IRS agents and be confident.
  • Keep the records organized. This will help and will make the auditing a smooth one at the time of auditing.
  • Deal clearly and honestly with the IRS.
  • At last, read all the tax notices by the IRS.

CONCLUSION:

So, instead of getting under the radar of IRS, it is better to have complete knowledge about filing the taxes and paying them on time and without any errors. We hope this article helped you with all the red flags that lead to IRS audit for your small business. And if you have any difficulty in avoiding IRS audit then you can contact our services provider.

In case you need any further help and assistance you can reach our team on +1-888-660-0575 for a quick resolution.

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